Commercial landlords have faced many challenges throughout 2020, as the COVID-19 pandemic rages on. Tenants attempting to wrongfully forgo rent payments and breaking leases entirely has left commercial landlords in the dust with no means of recoupment. Despite this, however, there is the potential for more small business funding through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Understanding how this funding for small businesses will be distributed and if it will help commercial landlords is incredibly important during this time.
The CARES Act and Commercial Landlords
For several months, lawmakers have debated the ins-and-outs of a secondary coronavirus stimulus package, which would follow the initial CARES Act that was released in the spring. Recent clashes over key issues including boosted unemployment payments, state and local aid, as well as the overall price of a new stimulus package have delayed the new stimulus package.
In October, President Trump called for lawmakers to immediately approve funding for both airline payroll support, as well as a second installment of the Paycheck Protection Program (PPP) that would go towards small businesses. This request for approved funding could potentially be good for not only the businesses that need financial assistance, but also for commercial landlords.
Of the many companies that did receive a PPP loan in the spring and summer months, several have now exhausted that funding. This has left business owners without the funds needed to keep their companies afloat and at risk of laying off staff and potentially having to close their doors for good. This situation could quickly become detrimental for commercial landlords that rely on regular rent payments from their tenants to turn a profit. While businesses that receive PPP funding must use the majority of it for payroll purposes to be eligible for loan forgiveness, the remaining funds can also be used for rent and other necessary expenses.
Having these new CARES Act funds in the hands business owners could help current tenants remain in compliance with their commercial leases, which would then spare landlords the stress of dealing with delinquencies or potential vacancies. Despite this, however, a new CARES Act package has yet to be approved at this time.
Legal Considerations for Commercial Landlords
Commercial landlords still have a long road ahead of them as the coronavirus pandemic continues. While this has created uncertainty for landlords, a few legal considerations have emerged for landlords to consider in planning for the future, including:
When negotiating potential rent deferrals and abatements, landlords and tenants alike should check to see whether or not a Subordination, Non-Disturbance, and Attornment Agreement (SNDA) with the other party’s lender was signed. This is because some agreements require a party to notify the lender if its borrowers default even if there is no intent to terminate the lease. On the other hand, other agreements require the lender be given an opportunity to cure the default. Lenders are important for the landlord and tenant’s negotiation process, and should not be overlooked as the SNDA will set out potential consequences of a breach.
Changes to Force Majeure Clause
For future leases, more time will likely go towards negotiating the force majeure clause, with close attention being paid to the following key components:
The trigger: Events that trigger a force majeure clause to be invoked are likely to be adapted in future leases. Pandemic events, public health emergencies, and governmental orders will likely be added to these clauses to ensure some catchall for events that are beyond a party’s control.
Notice: Some force majeure clauses require the party invoking the clause to give notice within a certain number of days. This can quickly become complicated if notice is required quickly following the triggering event. Parties should consider whether or not providing notice should actually impact the performance of a party. Tenants should also be mindful about whether multiple triggers will require multiple notices.
Remedy: Many leases do not permit any delay in payment obligations, such as rent. In the future, landlords should expect tenants with leverage to renegotiate the terms of their payment obligations. Some force majeure clauses cap the period of performance delay and require a party to perform when that period expires, even if the force majeure event is continuing. Another option to consider is whether a party may terminate the lease if a force majeure event prevents performance for a prolonged period.
Texas Commercial Lease Dispute Attorneys
Commercial landlords are facing many different challenges as businesses continue to wrongfully forgo making timely rent payments or abandon leases. These often-complex situations require the knowledge of an experienced commercial lease dispute attorney. At Raizner Law, we have years of experience representing commercial landlords in Texas and across the nation. If you are a commercial landlord dealing with a large or national tenant that is delaying or refusing to make rent payments at the expense of your business, we can pursue help. Contact Raizner Law today more information on how we can help.